In the investing world it helps to pay attention to what is going on throughout the world. When Japan was the economic powerhouse of the 1980s they were buying up properties in the USA and their stock market threatened to eclipse that of the USA. Even after the economic collapse caused by hidden debt and subsequent deflation Japan´s currency has remained a safe haven and events in Japan still affect Asia, Europe and North America. How do events in Japan help or hurt your investments today? Reuters provides a small example after a victory of Prime Minister Abe´s ruling party in Japan. The Abe approach to the Japanese economy is to stimulate it with an inflationary policies. This is referred to as Abenomics and a victory for Abenomics lifts world stocks as well as the dollar.
Japanese Prime Minister Shinzo Abe’s election victory lifted world stocks and the dollar on Monday, relegating concerns about Spain’s escalating political crisis to little more than a blip on the market radar.
Abe’s emphatic win, which heralds a continuation of Japan’s hyper-easy monetary policy, kept risk-on bets in play after fresh optimism about tax cuts in the United States had pushed Wall Street to a new record on Friday.
U.S. stock index futures pointed to a higher open for Wall Street, tracking gains for other major stock markets.
The spillover from the Abe victory and promise of more easy money in Japan is not just limited to the USA.
Also trading on Abe’s big win, euro zone borrowing costs fell, as bond markets ready for the European Central Bank to signal baby steps away from its ultra-easy policy stance on Thursday and for the U.S. Federal Reserve to hike rates in December.
German Bund futures FGBLc1 were up 0.1 percent.
“Now there’s a renewed mandate for quantitative easing, which means a weaker yen and stronger Japanese government bond prices. It also has a significant spillover for other developed markets,” said Peter Chatwell, head of euro rates strategy at Mizuho.
Events in Japan do not play out all by themselves. Rather they play off of issues such as possible large tax cuts in the USA.
As congressional action progresses so will the belief that tax cuts are in the wings. And thus the market may reignite and continue to go up. But eventually, what drives stock prices is the strength of the economy and one of the factors that drives or impedes the US economy is the cost of the nearly $18 Trillion US debt. In the end the issue comes down to who is right about tax cuts, the Republicans or the economists.
Economists may be concerned about economic policy in Japan or excessive tax cuts in the USA but the markets are excited about potentially higher stock prices based on at least temporary earnings increases. To the extent that events in Japan and elsewhere drive up stock prices you should play attention and to the extent that such policies in Japan or in the USA drive up debt you should beware.